Eating your own words

In the day-to-day conduct of commercial relationships, including those in the construction industry, the details of a contract negotiated years ago are often forgotten. Businesses make informal arrangements. Suppliers agree to be paid later. Buyers agree to accept goods that might not quite match the specification.

Despite such changes, the parties' original contract sometimes contains a clause stating that only changes recorded in writing can amend the agreed terms (often known as a no oral modification (NOM), no oral variation or, simply, variations clause).

Informal arrangements do not cause problems until the relationship between the parties breaks down. Suppliers want to be paid immediately. Buyers want the goods they specified. One party wants to rely on the contract wording, arguing that the change was not written down and so the contract remains unaltered. The other party wants to rely on the agreed amendment, arguing that because the two businesses are free to contract, the change, despite being informal, supersedes the originally agreed contract terms.

Until now, the courts' view on how to deal with this situation was unclear. However, reversing the Court of Appeal's decision, the UK Supreme Court in Rock Advertising has unanimously said the law should uphold NOM clauses (albeit that two of the judges did so for different reasons, highlighting the conceptual dilemma that in England, where there are limited contract formalities and parties are generally free to contract orally, it is hard to see how an NOM clause can prevent parties forming an oral contract to override the written contract containing the NOM clause).

Lord Sumption held that it did not go against public policy to restrict English law's contract formation flexibility by using an NOM clause. Parties should be able to express a clear intention to bind themselves as to how future changes in their legal relations should occur, because party autonomy operates until the point when the contract is made, but afterwards only to the extent that the contract allows. Other legal codes already contemplate such an arrangement, including the Vienna Convention on Contracts for the International Sale of Goods and the UNIDROIT Principles of International Commercial Contracts.

Lord Sumption regarded as ill-founded the theory that parties who agree an oral modification in spite of an NOM clause must have intended to override the clause. Agreeing an oral variation did not dispense with the NOM clause; it was merely a variation to which the clause applied. (Regrettably, as the oral variation in this case was ineffective, Lord Sumption declined to decide what would have constituted sufficient consideration had it been valid.)

A digestible result for the construction industry

Construction industry players enter into a wide variety of contracts. If they contain NOM clauses, this decision means parties need to stick to what they have agreed. Only a properly recorded change will be considered to have altered the originally agreed terms, and this will include the situation where both parties apparently agree to the oral change. Where parties wish to dispense with an NOM clause entirely to allow for more informal changes to be made as the life of the contract continues, their consent in writing will be essential.

This is broadly good news from a commercial perspective as it improves contractual certainty. As Lord Sumption pointed out, having formal requirements for amending contracts allows businesses to manage their commercial risk more effectively. They have more control over whether or not a contract is altered, who authorises the alteration and what its terms are. There is less risk of a dispute arising from unclear informal negotiations between the parties. And it makes it harder for an unscrupulous party to attempt to weaken its contractual obligations.

At the same time, many construction contracts do not contain NOM clauses, so the decision shouldn't generate unnecessary alarm.

And in any event, it is always advisable in practice, from an evidential point of view, to put orally or informally agreed changes in writing.

Even where NOM clauses are present, the Supreme Court acknowledged that the various doctrines of estoppel are available to safeguard against the risk that a party may act on a contract as varied orally or informally and then find itself unable to enforce it. In other words, a party may in some cases be precluded by his conduct from relying on an NOM clause to the extent that the other party has relied upon that conduct.

Estoppel will also assist a party who wishes to regularise relations with its counterparty by recording the nature of their current commercial relationship in line with an NOM clause's requirements, but finds the other party refuses to do so.

The judgment did not expand on what would be required for an estoppel to operate in this scenario. However, it acknowledged that the scope of estoppel could not be so broad that it destroyed the advantage of the parties having agreed an NOM clause, and that there would at the very least need to be unequivocal evidence that the parties had intended to make a change to the contract even though it had not been made in line with the formal requirements of the NOM clause. This would have to be more than just the decision to make the change in question.

Article written by Annie Lund (trainee solicitor) and Mark Corssley (senior knowledge lawyer) in London office.